Mumbai: Reserve Bank of India (RBI) governor D. Subbarao wants to position the repo rate, or the rate at which the central bank injects liquidity in the system, as the policy rate. This, according to him, will make transmission of monetary policy more effective. Edited excerpts from a press conference on Tuesday:
Probably, we are at the peak now or may be we will reach the peak next month... We should see the inflation trajectory coming down purely because of base effect and food price softening. The food inflation has come down from about 21% to about 10.4% now. But non-food contribution to inflation is about 70%. So 30% of the inflation is still driven by food prices and we think the good monsoon will moderate the food prices.
On transmission of monetary policy
Monetary policy action since January should start to kick in now. Transmission of monetary policy is something that we worry about all the time. It’s important that the signals we send should be transmitted to the banking channels.
On loan rate hike by banks
As credit picks up and liquidity tightens in the banking system, we expect both deposit and lending rates to go up. Because of the easy liquidity situation and less credit demand, banks have not been able to raise their rates. But I think transmission will be more effective going forward.
On repo becoming the policy rate
The absorption mode that we have seen so far will change to the injection mode. Going forward, the repo rate will be the operative rate as that way monetary transmission works better. We expect to shift from the absorption mode to the injection mode... For a marginal day or two, the reverse repo rate could be the policy rate, but thereafter, repo should be the policy rate.
On raising rates
This is to make credit dearer, contain demand pressure, restore liquidity corridor (the gap between repo and reverse repo rates) and make liquidity tighter.
On ideal rate corridor
When the liquidity adjustment facility (LAF) was introduced, the idea was to have the corridor at 100 basis points (bps). It went up to 300 bps, a situation that I inherited when I became the governor. After the latest hike, it is 125 bps. I get suggestions that the corridor should be maintained at 125 or 100 bps. Some even suggest that we should not have any corridor at all. Whether the present gap is a comfortable corridor, we have not determined yet. (One basis point is one-hundredth of a percentage point.)
On rising asset prices
It is true that we have not made explicit statements on asset prices in the policy document, but this is something that we have taken into account while formulating our policy. Asset prices is always an important input for inflation calculation of the central bank. We are keeping a watch on this.
On capital flow
Even in the crisis year, we had net positive capital flow. As per our internal projections, capital flow in the year 2010-11 will be just adequate to cover the current account deficit.
On RBI-government collaboration
Both RBI and government need to act together. The fiscal stance is going to be more pro-cyclical. The path for fiscal consolidation is a job not done yet. We will remain calibrated to the macroeconomic situation and growth inflation dynamics.
On six-weekly policy review
As we are exiting over the loose monetary stance, communicating every six weeks is called for. It is important also to contain expectation of any action on our part. It is true that the six weekly data will be much more limited, but, globally, we are getting data from every country and we have our own modelling and forecasting.
On the new banking licence norm
The discussion paper will come by the end of this month or the start of August. We will have to marshall international experience and see what should be the capital requirement, whether we will allow NBFCs (non-banking finance companies), automatically, etc.
On the monsoon
When I was at the start of my career as a sub-collector 35 years ago in Andhra Pradesh, I used to be concerned about the rains... At the end of my career now, still I am hoping for a good monsoon. All of us are chasing the monsoon.
On a neutral policy rate
One thing is that we have not reached a neutral policy rate. In a country like us and in an economy which is growing at a fast pace, there cannot be a neutral policy rate.